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By Alasdair Pal

LONDON, May 15 (Reuters) - World stocks fell on Tuesday as investors digested soft Chinese economic data and a lack of progress in U.S.-China trade talks, while a rise in U.S. borrowing costs supported the dollar.

MSCI's world equity index, which tracks shares in 47 countries, was down 0.3 percent.

Europe's benchmark Stoxx 600 was 0.1 percent lower while Germany's DAX shed 0.2 percent as first-quarter economic growth in the country came in lower than expected.

China reported weaker-than-expected investment and retail sales in April and a drop in home sales, clouding its economic outlook even as policymakers try to navigate debt risks and defuse a heated trade row with the United States.

Mixed messages in U.S.-China trade talks also weighed on sentiment.

The two countries are still "very far apart" on resolving trade frictions, U.S. ambassador to China Terry Branstad said on Tuesday as a second round of high-level talks was set to begin in Washington.

U.S. President Donald Trump drew ire from lawmakers after suggesting he would help Chinese firm ZTE Corp, that flouted U.S. sanctions on trade with Iran and North Korea, with intelligence officials also saying the decision threatens national security.

"Sino-US trade negotiations have provided mixed signals, the White House promising conciliation (over ZTE) then indicating that some form of punishment is still in the cards," said Mike van Dulken, head of research at Accendo Markets.

YIELDS RISE

In fixed income, the U.S. 10-year bond yield rose above the key level of 3 percent, sending borrowing costs higher in a number of other countries and supporting the dollar.

The 10-year yield was last trading at 3.0226 percent, just off levels not seen since January 2014.

In Europe, the benchmark German bond yield rose 14 basis points to 0.629 percent, with investors also taking note of hawkish commentary from Bank of France Governor Francois Villeroy de Galhau, who said the European Central Bank could soon give guidance on its first rate hike.

"We have this Galhau interview and he was very much pointing to rate hikes after the end of QE (quantitative easing)," said DZ Bank rates strategist Daniel Lenz, explaining the weakness in euro zone debt markets. "And we still have a high oil price and U.S. Treasury yields above 3 percent."

Against a basket of six major currencies, the dollar index gained 0.18 percent.

Oil prices were stable on Tuesday as ongoing production cuts by OPEC and looming U.S. sanctions against Iran threatened to tighten the market amid signs of ongoing strong demand.

Brent crude futures, the international benchmark for oil prices, rose to as much as $78.62 per barrel, touching a 3-1/2-year high.

"The commitment of Saudi Arabia and the rest of OPEC to the production cuts is a major factor in supporting the price at the moment as well as the possibility of reduced exports from Iran due to sanctions," said William O'Loughlin, investment analyst at Rivkin Securities. (Reporting by Alasdair Pal; additional reporting by Dhara Ranasinghe in London and Henning Gloystein in Singapore; Editing by Catherine Evans)